Embodiments disclosed herein relate to payment systems. In particular, some embodiments relate to methods, apparatus, systems, means and computer program products for dynamic interchange pricing in a payment processing network.
Payment cards are frequently used to pay for goods and services. One of the best known payment card systems is operated by MasterCard International Incorporated, which is the assignee hereof. As is very well known, cardholders present payment cards at point of sale terminals, or otherwise provide their payment card account numbers to merchants, in order to pay for purchase transactions.
Payment cards are issued by financial institutions such as banks to individual cardholders and to businesses and other entities. These financial institutions are referred to as issuers. The issuers of the payment cards maintain the payment card accounts of the cardholders.
Another class of participants in a payment card system is referred to as the “acquirers”. These are financial institutions which have relationships with merchants who accept payment cards in as payment for transactions entered into by cardholders. Acquirers in substance serve as the merchants' point of contact with the payment card system. To initiate transactions in the payment card system, merchants accept payment cards and transmit authorization requests to acquirers.
The operator of the payment card system (e.g., the assignee hereof) is sometimes referred to as the “payment card system operator” or just the “operator”. The payment card system operator operates a payment processing system that receives authorization requests for purchase transactions from the acquirers and routes the requests to the issuers of the payment cards. An example of a payment processing system is the “Banknet” system, which is operated by the assignee hereof. The payment card system operator also operates a clearing system by which settlement of transactions occurs between issuers and acquirers.
One aspect of a typical payment card system is referred to as “interchange”. An interchange fee is a small fee paid by the acquirer to the issuer with respect to a particular transaction. The purpose of the interchange fee is to compensate the issuer for a portion of the risks and costs it incurs. Interchange rates/fees are only one of the many cost components of the “merchant discount rates” that are established by acquirers and paid by merchants in exchange for card acceptance services provided by acquirers to merchants.
Interchange rates may in some cases be established on the basis of a bilateral agreement between an issuing bank and an acquiring bank. However, for many transactions in a payment card system, the interchange fee for a particular transaction is based on a “default” interchange rate established by the payment card system operator. Such interchange rates are “default” in the sense that they apply in the absence of a bilateral agreement between the issuer and the acquirer bank.
Interchange fees are a necessary and efficient method for maintaining a strong and vibrant payment card system. Setting interchange rates is a challenging proposition that involves an extremely delicate balance. If interchange rates are set too high, such that they lead to disproportionately high merchant discount rates, then merchants' desire and demand to accept a particular brand of payment card may be reduced. However, if interchange rates are set too low, then issuers' willingness to issue and promote the brand of payment cards will be reduced, and cardholders' demand for the brand of payment cards will also be reduced. In response to these competitive forces, a payment card system operator may strive to maximize the value of the payment card system (including total dollars spent with the system's cards, the number and types of cards in circulation, and the number and types of merchants accepting the system's cards) by setting default interchange rates at levels that balance the benefits and costs to both cardholders and merchants.
In a typical arrangement, the payment card system operator publishes interchange rates that apply to various categories of transactions. During the process of clearing the transactions, the acquirers determine which rates apply to the transactions based on information about the transactions received from the merchants.
A published set of interchange rates may apply, for example, to transactions submitted by merchants in the United States and charged to payment card accounts issued in the United States. Another set of interchange rates may apply to transactions submitted by merchants in the United States and charged to payment card accounts issued outside of the United States. Similarly, other sets of interchange rates may apply to transactions submitted by merchants in other countries, based on payment card accounts issued in those countries or outside of those countries.
Interchange rate tables may be organized by the type of card product under which the payment card account is issued. Each interchange rate may have a series of requirements, all of which must be satisfied in order for a transaction to qualify for that rate. The requirements may include such factors as: merchant category; the time between authorization and clearing; the presence or absence of magnetic stripe data; the submission of enhanced transaction data; and a merchant's sales and transaction volume in the payment card system. In some cases the transaction amount for the particular transaction must be above or below a particular transaction amount threshold for the transaction to qualify for a particular interchange rate.
Examples of merchant categories are restaurant, airline, vehicle rental, convenience stores, and fuel dispenser. There are many other merchant categories in use for establishing interchange rates.
Typically an interchange rate is composed of one or both of two components, namely a percentage of the transaction amount and a flat per transaction charge. A typical percentage amount for an interchange rate may be in the range of 1.5% or 2.0% (although higher or lower percentage amounts may apply in some cases). A typical flat per transaction charge may be $0.05 to $0.10. Thus, for example, certain transactions may qualify for an interchange rate of 1.55%+$0.10, whereas other transactions may qualify for an interchange rate of 1.90%+$0.05. Many other combinations of percentage plus flat fee are in use. A percentage alone without flat fee is also applicable to some categories of transactions. Also, for example, some interchange rates may simply be a flat fee such as $0.75. For some categories, an interchange rate that includes a percentage (with or without a flat charge component) may be subject to a minimum fee floor and/or a maximum fee ceiling per transaction.